The Accidental PFIC: What U.S. Parents in Israel Need to Know About "Savings for Every Child" (Chisachon LeKol Yeled)
In Plain Terms
If you are a U.S. citizen living in Israel, or if you hold dual U.S./Israeli citizenship and have children, you are almost certainly participating in a national government program called Chisachon LeKol Yeled (Savings for Every Child). Under this initiative, Israel’s National Insurance Institute (Bituach Leumi) automatically opens a savings account in your child’s name at birth and deposits a small monthly stipend into it until they turn 18.
It sounds like a straightforward, stress-free gift for your child’s future.
The catch? Under U.S. tax law, the specific account option chosen or assigned to you by default can accidentally trigger some of the most punitive, complex, and expensive filing rules in the U.S. tax code: the Passive Foreign Investment Company(PFIC) regime.
The short version
The Bank Option (Pikadon): Safe from PFIC status. If the money sits in a commercial bank account, it is treated as standard foreign interest.
The Investment/Provident Fund Option (Kupat Gemel): High risk of PFIC status. If the funds are invested in mutual-fund-style tracks (e.g., through companies like Altshuler Shaham or Meitav Dash), the IRS views this as an offshore pooled investment fund.
The Default Trap: If you didn't select an option when your child was born, Bituach Leumi automatically placed the money into a Kupat Gemel default investment track.
The Good News: Because the balances start small, your child may qualify for a U.S. de minimis reporting exemption during their early years, but a major tax trap awaits when they turn 18 or 21 and cash out.
Below, we break down the underlying statutory mechanics for cross-border tax advisers, dual Israeli/US Citizens and expat parents managing U.S.-Israel tax compliance.
The Legal Framework: Bank Deposit vs. Investment Provident Fund
When setting up a Chisachon LeKol Yeled account, Israeli law gives parents a choice between two legal structures confirmed on the National Insurance Institute's own program page. For U.S. tax purposes, this structural distinction matters a great deal.
1. Commercial Bank Deposit (Pikadon Bunkai)
U.S. Tax Status: Generally not treated a PFIC.
Accounts established at participating commercial banks (e.g., Bank Leumi, Bank Hapoalim) function as fixed-term cash deposits or variable interest savings vehicles. Because the bank is an operating commercial institution and not a pooled foreign investment vehicle, the account does not meet the definition of a PFIC under Internal Revenue Code (IRC) §1297.
U.S. Compliance: Growth is treated as ordinary foreign bank interest, reportable on Schedule B of the child's U.S. tax return (Form 1040) if a filing threshold is met. The account must also be evaluated for annual FBAR (FinCEN Form 114) and FATCA (Form 8938) reporting under the applicable aggregate-value thresholds.
2. Provident Fund (Kupat Gemel LeAshka'a)
U.S. Tax Status: Generally analyzed as a PFIC (IRC §1297).
Provident funds managed by investment houses (e.g., Altshuler Shaham, Meitav Dash, Harel) pool participant funds into underlying securities, bonds, or equity indexes (such as S&P 500 tracking tracks). Under IRC §1297(a), a foreign corporation is a PFIC if either:
75 percent or more of its gross income for the taxable year is passive income (the "income test"), or
At least 50% percent of the average value of its assets, during the taxable year, produce passive income or are held to produce passive income (the “asset test”).
Because a Kupat Gemel is a foreign entity holding passive assets, most such accounts meet one or both of these tests, and the IRS treats the child's interest as PFIC stock requiring specialized reporting on IRS Form 8621 (Information Return by a Shareholder of a Passive Foreign Investment Company), absent an applicable exception.
Key Technical Pitfalls for Dual-Citizen Families
1. The "Beneficial Owner" Statutory Rule
Even though Bituach Leumi deposits the funds and parents manage the elections, the account is legally opened under the minor child’s Israeli ID (Teudat Zehut). Under U.S. tax law, the minor child, as a U.S. citizen, is the beneficial owner of the foreign account and its underlying assets. The child's legal status as a minor does not exempt them from U.S. tax jurisdiction or foreign asset reporting obligations.
2. The $25,000 De Minimis Exception (Treas. Reg. §1.1298-1(c)(2))
Under Treasury Regulation §1.1298-1(c)(2)(i), an individual U.S. shareholder is generally exempt from filing Form 8621 for a given PFIC if:
• The aggregate value of all PFIC stock owned directly (or, for certain indirectly-owned section 1291 fund stock, a lower $5,000 threshold applies) at the end of the tax year does not exceed $25,000 ($50,000 if filing jointly), and
• The taxpayer did not receive an “excess distribution” under section 1291(b), recognize gain treated as an excess distribution under section 1291(a)(2), or have a section 1295 qualified electing fund (QEF) election in effect for that fund.
Given that combined monthly deposits are modest, NIS 58 per month from the National Insurance Institute, or NIS 116 if a parent matches it, as of January 1, 2026, most young children will remain well under the $25,000 cumulative threshold for a number of years, sparing them from filing annual Forms 8621 in early childhood. This should be confirmed each year against the account's actual reported value, not assumed indefinitely, since deposits compound and thresholds are not indexed for inflation.
3. The Age 18/21 Distribution Trap (IRC §1291)
When the child reaches age 18 (or 21 if they defer withdrawal to receive government bonus grants) and liquidates the fund:
The $25,000 de minimis exemption no longer applies in the year of disposition/distribution.
The withdrawal triggers the default statutory rules of IRC §1291 (Excess Distributions).
Under §1291, cumulative capital gains are thrown back pro-rata over the entire holding period, taxed at the highest ordinary U.S. income tax rate in effect for each prior year, and assessed an compounding nondeductible interest charge for deferred U.S. tax. This can wipe out a significant portion of the growth earned over 18 years.
Practical Guidance for U.S. Expats in Israel
Check Existing Accounts: If you have children born in Israel, log in to the Bituach Leumi online portal or contact their call center to verify whether their savings are held in a bank (Pikadon) or a provident fund (Kupat Gemel) track.
Structuring New Births: For new additions to the family, electing the Bank option (Pikadon) within the first 6 months of life cleanly sidesteps the entire PFIC framework.
Understand Transfer Restrictions: Under current Israeli regulatory rules, funds held in a bank savings plan cannot be transferred to a provident fund later. Conversely, moving from a provident fund back to a bank is strictly limited once established.
Monitor the $25,000 Threshold: Track cumulative growth across all foreign investment funds held by the child. Once the total exceeds $25,000, consult a dual-qualified U.S.-Israeli tax professional to evaluate whether making a Mark-to-Market (IRC §1296) election is appropriate to avoid future IRC §1291 interest penalties.
This article is intended as general educational information on international cross-border tax compliance and does not constitute formal legal or tax advice for any specific individual situation. Taxpayers should consult a qualified U.S. international tax specialist regarding their specific foreign account disclosures.
